A Tale of Two Pension Funds
Why do some defined benefit pension plans work well while others do not? Some have recovered since the 2008 financial crisis while others — including California’s public pension funds — are in worse shape. The difference arises from choices made by managements and boards. Defined benefit pension plans can work just fine when properly managed.
One good-management principle is timely financial reporting, as illustrated below in the first of a series on best practices. It’s also a timely subject because today marks the end of the current fiscal year for California’s public pension funds, starting the clock for their next financial reports.
Berkshire Hathaway, one of the world’s biggest companies, is able to issue its annual report within two months of its fiscal year end and include up-to-date reports on its pension plans (see footnote 21 in 2015 annual report). But the California State Teachers’ Retirement System (CalSTRS), less than half Berkshire’s size, doesn’t issue its annual report for nearly six months and even then does not include up-to-date reports for its pension funds. See, e.g., this chart from CalSTRS’s 2015 annual report:
Notice that actuarial statistics for 2015 are missing even though CalSTRS’s 2015 fiscal year had ended nearly six months earlier. Those statistics weren’t issued for another three months, in a separate report:
Notice that the chart shows CalSTRS’s Unfunded Actuarial Obligation had grown $3.5 billion in 2015, a substantial addition to the state’s debt. But no one knew. That’s because CalSTRS’s delay forced Governor Brown to rely on two-year-old CalSTRS figures when proposing his 2016–17 budget, thereby ignoring both the fact of the new debt and that its size was more than double the amount of debt the governor proudly proposed to pay down (see pages 3 and 125 of Governor’s Budget).
That’s one example of how delayed financial reporting by California’s pension funds has played a major role in the stealth-like expansion of California’s unfunded retirement obligations. General Obligation Bonds may not be issued without voter approval, but pension obligations may be issued solely by elected officials — and even they are kept in the dark.
That’s no way to run a business much less a public enterprise with enormous impact on California’s schoolchildren (the greater CalSTRS’s unfunded liabilities, the more money drained from education budgets). CalSTRS’s fiscal year ends today. They should endeavor to issue timely financial reports by the end of August. Mark your calendars.